II. The Structure of the Electric Energy Industry
III. An Industry in Transition
IV. Issues for Washington's Legislators and Residents
Other Sites of Interest on the Web
or most of our lives, the electric industry has
been reliable, affordable, slow to change and relatively risk-free. We call our local
utilities and they are willing and eager to provide us very reliable service. Costs are
averaged among users of the same class so that we pay the same rate for our electricity as
our neighbors, regardless of how long we have had service or how wisely we use
electricity. Utilities earn either no profit (if publicly owned), or a profit set by state
regulators. As part of their public service obligation, utilities make investments on our
behalf that have low risk and relatively affordable costs. Thus, utilities have been
treated almost as partners with government in ensuring that the very high social values of
electricity can be delivered to citizens at an affordable cost and minimal environmental
disruption.
But the rumbles of change have been heard for many years. Starting in the early '70s, public and policy-makers raised concerns over the seemingly unending growth in costly new power plants, together with environmental impacts that were unacceptable to many. Oil embargoes affecting oil-fired generating units, the Three Mile Island nuclear accident, heightened environmental concerns over air and water quality, and construction cost overruns all contributed to widespread dissatisfaction with the investments our utilities were making on our behalf. While economic growth continued, energy consumption leveled off, breaking the historic link between demand for energy and economic expansion.
To respond to these changes, federal and state laws were passed that required utilities, including the Bonneville Power Administration (Bonneville), to take a look at all energy options, including energy conservation, and acquire resources that had the lowest overall long-term cost. If this meant acquiring resources from independent power producers or conservation providers, utilities had to do so. Further, if the least cost solution was to terminate or mothball an existing project or plant, utilities were encouraged to do so.
The costs of past actions are still with us. Consumers pay an enormous premium to retire the debt associated with nuclear power plants, most of which were never finished or operated. The devastation to wild salmon wrought in large part by hydroelectric dams on the Columbia River is only now becoming apparent, and mitigation is extremely costly. One of the central and most controversial questions in electric industry restructuring is, "How should the costs of these past actions be paid, and by whom?"
Today, the rumble of change has grown to a roar. In the 1995 Biennial Energy Report we had just begun to think about the implications of these changes. Now in 1997 the changes are upon us; indeed, they are happening so fast that they are difficult or impossible to track. In a word, the change is characterized by more competition.
Most of the issues legislators will face in the upcoming sessions have to do with
competition. Competition can benefit Washington by reducing prices and improving
efficiency and productivity. However, competition can produce both winners and losers. On
the producing side, competition can force businesses into reduced earnings or even
bankruptcy. On the consuming side, competition can mean that consumers with more
bargaining power and more information will get lower costs while consumers without these
advantages may face higher prices. Finally, competition can undermine the incentive to
make long-term investments that minimize costs, protect the environment, and ensure
reliability. The goal for Washington should be to structure competition so as to align the
private interests of suppliers and consumers with the public interest in clean,
affordable, equitable, and reliable energy system.
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| Glossary | List of Acronyms
o set the stage for recent developments, it may
be useful to describe the basic landscape of the Washington electric industry as it exists
today, and some of its unique features. To begin with, just as in other sectors, electric
energy is sold on a wholesale and a retail basis. Each has its unique structural,
statutory, and regulatory framework.
Independent generators, federal power administrations, and generating utilities sell wholesale power to electric utilities or other intermediaries, who then sell retail electricity to end users. Prices for wholesale power that is sold by privately owned utilities are regulated by the Federal Energy Regulatory Commission (FERC). Prices for wholesale power sold by independent power producers or publicly owned utilities are not generally regulated.
Wholesale power is transported over a high voltage transmission system, which is owned both by Bonneville and by private and public utilities. FERC regulates the pricing of transmission owned by private utilities.
The wholesale electric power business is an important element of Washington's economy. Washington-based electric generation provides well over half of the wholesale power sold in the Northwest. [Note 1] As discussed further in this section, the wholesale industry has been undergoing major changes since the late 1970s, which are now beginning to accelerate. These changes are designed to make the wholesale power business fully competitive by the turn of the century.
Electric power is sold both by publicly owned and privately owned utilities. Washington is unusual in having a large percentage — a little more than half — of its retail electric energy provided by public, or consumer-owned utilities. Figure 1 shows that in 1994, public or consumer-owned power provided 52 percent of the retail power in Washington; Bonneville sold 16 percent of power consumed in Washington to the several large industrial customers termed the direct service industries; and private, or investor-owned utilities provided approximately 32 percent of the retail power consumed in Washington.
As in the wholesale sector, public and private utilities get their power from a variety of sources. Figures 2 and 3 show that there are distinct differences in the sources of power between publicly and privately owned utilities. The most notable difference is the percentage of power that publicly owned utilities obtain from Bonneville. This is largely due to the statutory rights that publicly owned utilities have for first and priority call on Bonneville, termed public preference.
In addition to these differences between private and public utilities, there are key structural differences. Privately owned utilities are regulated by the Washington Utilities and Transportation Commission. Publicly owned utilities are regulated by locally elected commissions in the case of public utility districts, or city councils in the case of municipal utilities members in the case of cooperatives. Government-owned utilities also have certain tax advantages, including exemption from property taxes and income taxes. [Note 2] They are, however, subject to state and city public utility taxes. Additional differences between public and private utilities are discussed further in the section on jurisdictional issues in this chapter.
Figure 2-1. More Than Half of Washington's Retail Power is Provided by Publicly Owned Utilities
Figure 2-2. Washington's Publicly Owned Utilities Rely Heavily on Bonneville
Figure 2-3. Washington's Privately Owned Utilities Have
Diverse Power Resources
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| Glossary | List of Acronyms
s we noted in the introduction to this chapter,
changes are occurring in the electric industry, characterized generally by the
introduction of more competition in both the wholesale and retail sectors. This section
discusses some of the features and factors that have led to this increased competition.
The transition to competition is both the cause and effect of a trend toward declining costs of producing electric power. Deregulation of the wholesale natural gas market has led to sharply declining fuel prices and spurred technological advances in the design of new natural gas-fired power plants. This has made it profitable for utilities or power producers to run existing gas-fired generation more frequently and to build new inexpensive, efficient plants. These developments are not only displacing higher-cost electricity such as coal or nuclear, but have also increased electricity supplies. Some of the policies and laws that provided incentives for lowering costs include:
Using Bonneville as a typical example, Figure 4 shows the historic relationship between the cost of new power purchases and the cost of existing facilities, represented by the cost-based "PF (priority firm) rate". The solid line represents this historic and projected cost of Bonneville power. Dashed lines represent the costs of new generation. Past "eras" dominated by three generation alternatives — nuclear, coal, and natural gas — are separated by vertical bars. The future has the dashed line splitting in two to depict high and low estimates of the cost of electricity on the bulk market, which is the current alternative. Besides the fact that the cost of producing new power is declining, we see that we are in a period where new cost is slightly cheaper than historic cost. This trend is partly due to technological advances, but is mostly due to the fact that we are in a situation of excess power, combined with low fuel prices. This means that power can be priced at approximately the running cost of a plant, and does not include the capital cost of building a new facility. The implications of this phenomenon are discussed below in the section on stranded investment.
Figure 2-4. BPA's PF Rate is Currently Higher Than Market Prices
If there is any common characteristic of regulated industries in the United States over the past several decades, it is the trend towards increasing customer choice. In a number of industries the rationale for preserving a monopoly has been eroded or reconsidered. This occurred in the airline industry, in the telephone industry, in the wholesale natural gas and electric industry, and is now beginning to occur in the retail electric power industry. A nationwide push for more choices for retail customers is occurring. Several states are exploring or implementing retail access pilot programs. New Hampshire's pilot program is the furthest along, and preliminary information is available from it. California has passed legislation mandating retail competition. Internationally, countries such as Norway, Great Britain, New Zealand and Chile have recently created competitive electric industries or privatized previously government-owned power systems. It is important to recognize that competition will most likely focus on generation, or power services. Meters and wires will more likely remain monopoly services.
Washington is at or near the forefront of states experimenting with retail choice,
because our statutes, unlike other states, already permit retail competition. As of the
writing of this report (late 1996), at least ten retail utilities are experimenting with
either full retail choice (where the customer buys energy directly from an independent
provider or retail competitor) or "virtual" retail choice, where the utility
sells power at market-based prices. About 600 average megawatts (aMW) of power is already
being sold at market prices with another 600 aMW of load eligible but not yet under
contract. This amounts to about 10 percent of Washington's retail load. So far, these
market-based prices are only available to the largest industrial customers. Another 10
percent may soon be eligible for market-based prices or retail choice, if utilities follow
through on plans to extend access to the commercial and residential classes. A summary of
utilities with market-based pricing programs is included as Appendix A.
One segment of retail users has taken advantage of limited retail competition for years — the direct service industries (DSIs), predominantly aluminum companies. They have had the opportunity to choose between their local provider and direct service from Bonneville. Their very large, flat loads (flat meaning they use a relatively consistent amount of power 24 hours a day) and low cost to serve them, make them attractive energy customers. Recently, the DSIs negotiated a contact with Bonneville that allows them direct access to the wholesale market for a portion of their load. The legality of these contracts has been challenged in court.
Increased retail choice will affect Washington's electric utilities, their customers,
and possibly the environmental and economic health of the state. On the surface, these
changes include mergers and acquisitions, possible privatization of the federal power
authorities, and competition for customers within the electric utility industry. Perhaps
less obvious is that utility restructuring may change how we acquire new resources; who
provides energy to consumers; which regulations exist to protect consumers, our
environment, and system reliability; and who is paying the bills. The following sections
will explore some of the implications that retail choice may have on cost recovery, the
environment, state law, tax revenues, and other important issues.
Top of Section | Contents
| Glossary | List of Acronyms
he previous pages have described Washington's
electric industry and have introduced the notion of a transition to competition. We turn
now to a series of sections that identify possible decisions that legislators may face
over the next two years. These include stranded costs, public purposes, industry and jobs,
the environment, tax issues, the comprehensive review of the Northwest energy industry,
jurisdictional issues, and transmission. Many of these issues are too complex to cover in
adequate depth here. Appendix G provides names and phone numbers
for key contacts on these issues.
For the first time in years, the marginal, or incremental, cost of buying electricity in the marketplace is cheaper than the existing resource mix of most utilities. While this reduction in the cost of power and new plants is good news, it also presents a challenge. Utilities still have not finished paying for the large, expensive power plants (mostly coal and nuclear) they had committed to in the 1970s and '80s. The result is that many utilities are committed — either through ownership or contractual obligations — to relatively high cost power that is much less valuable than it used to be. (Notable exceptions are public utilities in central Washington that own large supplies of low-cost hydropower.) Additionally, utilities' well-informed, larger customers are seeking access to low-cost market power.
The dilemma of how to pay for existing power when new power is more attractive is termed the "stranded cost" problem. Stranded costs refer to the utility's unavoidable generation costs that cannot be fully recovered at market prices. By definition, stranded costs have to be paid for by someone. The question is: who?
Intense debate is occurring nationwide on the answer to this question. Should stranded costs, as utilities claim, be paid by some or all ratepayers? Should the costs, as customers claim, be partly or wholly absorbed by the shareholders (if any)? Should the costs be paid by some combination of both?
The stranded cost problem is unique to industries that are undergoing deregulation. Traditional utility regulation has been premised on the "regulatory compact", under which monopoly utilities earn a fair rate of return on all prudently incurred costs in exchange for providing service to all customers at reasonable prices. In unregulated industries, by contrast, companies have no guarantees of earning a return and all the risks associated with business investment lie wholly with a company's owners. These risks include a lower than expected rate of return, delayed payback, and even bankruptcy. With the introduction of competition and the ending of the regulatory compact, utilities face a world that is far less certain than in the past. How the stranded cost issue is resolved will play a large role in determining which companies survive the transition to competition.
The stranded cost question has equity and cost implications. The equity issue relates to allocation of past costs. These costs were incurred under a "regulatory compact" in which utilities could legitimately expect that all their prudent costs would be passed along to captive customers. In return, utilities were obligated to serve customers upon request and to meet growth in demand as it occurred. Now that the rules are changing, how should the uneconomic portion of these costs be allocated? The equity issue reaches beyond shareholders to include concerns of equity among customer classes. One's perception of "equity" is likely to vary depending upon whether one is a high or low-cost utility, a shareholder, a competitor, or a customer. And within these groups there may be differences of opinion.
The cost issue relates to future stranded costs. Shareholders and lenders, who are now on notice that they may no longer have a fixed pool of customers, will likely demand a higher rate of return or interest rate for their investments. The increased cost of capital will partially offset the effect of competition-induced efficiencies.
How do stranded costs interact with retail choice? As large industrial customers of both private and public utilities in Washington successfully push for access to cheap market power, they leave behind a higher cost resource mix for the remaining "captive" or "core" customers to pay. This evokes two primary questions: "Who pays for these stranded costs?" and "Why don't all customer classes get simultaneous access or sharing of the benefits?"
This same debate applies to Bonneville with regard to wholesale power transactions. The largest stranded cost in the region is the uneconomic portion of an $8 billion Washington Public Power Supply System debt that Bonneville is paying on behalf of the region. This amounts to a $550 million annual payment in principal and interest. The cost of fish recovery and support for irrigation projects is also considerable. Although Bonneville's system without irrigation support, fish recovery, and nuclear power is one of the best bargains in the nation, including these costs has resulted in Bonneville's inability to recover all of its costs and compete with the current market for wholesale power. This creates a stranded cost problem for Bonneville and the federal government and is driving many of the discussions within the Comprehensive Review, discussed further below.
Other states already experimenting with retail choice have come up with a range of solutions. In California, ratepayers will pay 100 percent of direct stranded costs, although shareholders' return is lowered. The stranded cost will be borne by all existing customers. New England utilities, on the other hand, have split stranded cost between ratepayers and shareholders. Washington, so far, has no uniform solution.
At the retail level in Washington, the stranded cost problem is currently facing public utility boards, councils and commissions for publicly owned utilities, and the Washington Utilities and Transportation Commission for investor-owned utilities. Because different utilities and jurisdictions are resolving the issue differently, questions could be raised by customers who may feel they are being treated unfairly compared with their neighbors. The lack of uniformity may create pressure to have a uniform solution legislated at the state level.
The issue of stranded costs is, by definition, an equity issue, since the question is not whether to pay the costs, but who should pay. The answer to this question will determine not only who is able to share the benefits of low market prices, but who is responsible for paying millions of dollars of stranded costs within the state.
— Energy Issues: Centralia Coal Plant and Mine — One of the first electric utility issues to come before the legislature in the 1997 session will be proposed tax incentives for the Centralia power plant and mine. Cleanup of the plant's sulfur dioxide (SO2) emissions, which are blamed for reducing visibility in Mt. Rainier National Park, has been the subject of intensive negotiations during the last year. Participants in the "Collaborative Decision Making" (CDM) process reached agreement in September on a package of pollution controls which would ultimately reduce the plant's SO2 emissions by 80-90 percent. The agreement, called the "CDM target solution" would require the installation of two limestone "scrubbers", the first in 2001 and the second in 2002. Because of the expense of the proposed solution, and because current market conditions have cut deeply into the plant's profitability, the agreement also calls for some $370 million in tax incentives. The incentives represent approximately three-quarters of the total cost of the proposed agreement. Changes in the regulation of the electric power industry make this issue more complex. Under the existing regulatory regime, plant owners could implement the target solution with the reasonable certainty of being able to recover their costs in a rate case before the UTC. With the advent of competition, however, approval of the tax package provides no guarantee that the plant will continue to produce power at a competitive price. Wholesale power markets are extremely competitive, and the plant already operates at less than 50 percent capacity because of low power prices. Should the plant become uncompetitive in the future due to market conditions or regulations to curb carbon dioxide emissions, investments in pollution control equipment may become "stranded." Regulators and legislators may face the issue of whether the new investment of $500 million in pollution control equipment will be eligible for stranded cost recovery. Critics of the target solution have also questioned the wisdom of providing public support for continued operation of a coal-fired facility at a time of declining investment in energy efficiency and renewable resources. The target solution for Centralia thus illustrates some of the changes that can be anticipated with competition. Better pollution control is clearly desirable and employment at the plant and the mine is important to the local economy. However, allocation of the costs of large capital investments in energy facilities will pose new questions in a competitive environment, where cost recovery is not guaranteed. |
Electricity is a service and commodity that is indispensable to the functions of a modern economy. Production of electricity also has enormous environmental implications because of its impact on water, land and air. In addition, resources needed to generate electricity (e.g., money, land, and water), also are needed for other purposes. Because of its unique status in our economy, and because of the unique regulatory framework under which it operates, electricity has borne with it a responsibility to achieve important public purposes. In the Pacific Northwest, these include support for irrigation, navigation, and recreational benefits of the hydroelectric system that are now a significant part of Washington's economy. Public purposes also include energy conservation, renewable resource development, support for low-income households, and rural development.
This section focuses on five public purpose topics:
1. Electric Energy Conservation
2. Electricity from Renewable Energy Resources
3. Support for Rural Communities
4. Irrigation
5. Support for Low-income Customers
Environmental issues, including fish and wildlife, are discussed later in this section, as are economic issues. While agreement on the importance of these benefits is widespread, there is a wide disparity of opinion on how to continue these benefits in a new competitive utility environment. The discussion that follows provides brief background on each topic, followed by a discussion of the range of options proposed to ensure their continued viability.
Since the late 1970s, Washington and other northwest states have successfully operated some of the largest and most successful electricity conservation programs in the world. Least cost planning laws and rules mandate that many utilities, as well as Bonneville, acquire lowest total cost resources to meet their customers' energy needs. [Note 4] Because conservation has long been one of the cheapest "resources" available to meet demand, conservation and other efficiency programs have been a critical component of all Washington utilities' resource acquisition programs. These programs have produced savings equivalent to the total electricity consumption of Seattle. Although annual investment by the region's investor-owned and public utilities has exceeded $300 million, this was still less than half the direct cost of building comparable new generating facilities. [Note 5]
The declining cost of generation and the short-term West Coast electricity surplus now make electricity conservation less valuable than during the 1980s and early 1990s. Nonetheless, there is general agreement that a large amount of cost-effective conservation is still available in the Northwest. The Northwest Power Planning Council (NWPPC), in its draft 1996/97 power plan, estimates the 20-year regional conservation resource at more than 1,500 average megawatts, or more than one and one-half the energy use of the City of Seattle. [Note 6] The Council estimates that failure to capture these energy savings would cost the region $2.3 billion.
Discussions of electricity conservation at a regional level have revolved around the appropriate mechanisms for acquiring this resource. When a utility has the sole responsibility to acquire resources for its captive customers, it is appropriate for a utility to ensure that all cost-effective conservation is acquired. However, a restructured, more competitive retail industry makes direct, utility-by-utility acquisition of conservation more problematic. The cost of typical conservation measures consists almost entirely of large, up-front capital investments with little or no continuing "operation" cost. Alternative resources, such as gas turbines, have lower initial capital costs but include a stream of future operating and fuel costs. Due to existing financing and rate recovery structures, and concerns over competition, utilities may find these lower first-cost resources more attractive even if they are more costly over the long-term. As a result, they have already cut back substantially on their investments in energy efficiency.
Achievement of cost-effective energy efficiency has long been hindered by a variety of market barriers, including: inadequate information, lack of capital, "split incentives" between building owners and occupants, and others. As a result, even in regions with much higher electricity prices, cost-effective conservation opportunities are routinely missed. Consequently, consumers pay higher energy costs.
Over the past 15 years, policy-makers and utilities have undertaken a variety of strategies to overcome these market barriers and deliver cost-effective energy savings. These strategies range from improved energy codes and standards to rebates for efficient motors and appliances to consumer information programs, to name but a few. As a result of these strategies, the Northwest region has saved over 1000 average megawatts of power — enough to meet the annual electricity demand of a city the size of Seattle — at roughly half the cost of building new power facilities to meet the same need. These savings have been achieved with no reduction in the quality or quantity of energy services (heat, light, motor drive, etc.). Energy efficiency strategies have been designed to squeeze more work out of less energy, not to sacrifice comfort or convenience.
In the future, the market for energy efficiency services will continue to evolve. However, many market barriers are likely to persist. The Northwest Power Planning Council estimates that approximately one-third of the cost-effective conservation opportunities will be captured by market forces. The other two-thirds will require continuing investment to remove market barriers. A widely accepted guiding principle for these investments is that they should strive to improve the functioning of the private market for energy efficiency, rather than supplant that market. As a result, one of the most important energy efficiency strategies in the future will be "market transformation," a systematic effort to ensure that markets evolve to deliver more efficient products and services. This year, the Northwest Energy Efficiency Alliance was formed to facilitate these market transformation ventures.
As energy markets become more competitive, energy efficiency investments are at risk. In the future, the challenge will be to fund these investments in a competitively neutral manner. Because these investments deliver system-wide cost savings and environmental benefits, they should be funded in a way that does not disadvantage one energy provider relative to another. To respond to this challenge, Washington Water Power (WWP) uses a "system benefits charge" that applies to all users of its distribution system, whether they purchase power from WWP or another supplier. California has adopted this approach statewide as part of its landmark utility restructuring effort. The regional Comprehensive Review has proposed adoption of a statewide minimum standard for public purpose investments of three percent of electric service revenues. This standard, applied equitably, would ensure an adequate level of investment to capture cost-effective energy savings, without placing any one provider who makes such investments at a competitive disadvantage. The Comprehensive Review proposal would ensure maximum local control of the use of these funds, while establishing an effective standard that ensures an appropriate minimum level of investment without competitive bias.
The Pacific Northwest's electric energy system was founded on renewable energy resources. More than 50 percent of Washington's electricity is generated by hydroelectric dams. However, the age of substantial new hydropower development is gone. Promising new renewable resources include solar, wind, and geothermal electricity generation. Renewables can offer substantial environmental benefits (minimal pollutant emissions, no greenhouse gases, etc.), and a greater diversity of supply options. Currently, for Washington, most electricity generated by renewable resources ranges from slightly to substantially more expensive than natural gas generation. However, in other parts of the country and around the globe, renewables may be a more cost-effective option, especially in remote or high cost areas. Some renewable electric technologies, such as solar electric pumping for stock watering in remote locations, are cost-effective today. Some renewables are also cost-effective in specific, direct (non-electric) application. These include geothermal district heating in parts of Eastern Washington. Washington has a substantial endowment of renewable resources, and a number of firms that specialize in renewable resource technologies.
Like energy efficiency, renewable resources face enormous market barriers. Many of the environmental advantages of renewables are not reflected in their price. And, while the cost of renewable resources has declined substantially in recent years, the cost of natural gas-fired power has dropped even more. In the short run, renewables are unlikely to fare well in wholesale market competition where price is generally the determining factor. However, the environmental benefits of renewables may be an attractive feature in retail competition. Also, because they produce no greenhouse gases, they may become increasingly desirable in as greenhouse emissions targets are developed and adopted internationally. As a result, some continued investment in bringing these resources to market is probably justified.
The regional Comprehensive Review recommends modest investments in the following three areas: renewable research and development; direct application of renewables, such as geothermal district heating and solar hot water; and renewable resource "market transformation," including financing packages and other measures to develop the market for renewables.
Because rural customers are more dispersed, it costs more to serve them than it does urban or suburban customers. However, the nation and state have long considered universal affordability of electricity to be an important public purpose. Therefore, rural utilities receive subsidies intended to average out the cost of electricity among rural and non-rural customers. These include so-called postage stamp rates for transmission, whereby all transmission purchasers pay the same rate regardless of the distance power must travel over transmission lines. They also include direct tax subsidies for low-density utilities. The development of rural cooperatives, with federal subsidies and encouragement, played a very large role in the economic recovery of rural Washington during the Depression. Many residents would not have been able to afford power without these subsidies and cost-averaging techniques. They have played a crucial role in the development of many rural Washington communities.
In a new, restructured electric industry, the concept of rural subsidies may be less resilient. Energy providers may not be attracted to sell power to remote, rural customers unless their full costs are recovered.
Among the many reasons for the development of the Columbia River dam system was to provide increased irrigation for eastern Washington agricultural development. Today more than seven million acres of land in the Columbia and Snake river basins are irrigated with nearly 14 million acre-feet of water removed from the rivers for this purpose. Irrigation is an important element in Washington's agricultural economy. Nevertheless, irrigation activities create costs to the hydroelectric generating system that include foregone power production (due to water withdrawal), energy use for irrigation pumping, and power sales payments for irrigation capital expenditures. There is substantial debate over the size of both the benefits and costs of irrigation.
In a restructured utility environment with a stronger emphasis on keeping cost low,
irrigation issues are likely to have increased significance as part of the overall
discussion of how the Columbia/Snake river system should be operated (see environmental
section, below). One example involves tradeoffs among irrigation withdrawals, possible
increases of in-river flow for fish enhancement, and decreases in power production.
Approximately 15 percent of the households in Washington have incomes that are at 125 percent or less of the federal poverty level. Despite the region's low electricity costs, energy expenditures are significant for these households, especially during the winter months. Federal and state policy makers and utilities have long recognized these impacts on low-income customers and have developed a variety of weatherization and bill payment assistance programs. However, over the last 10 years there has been a substantial decline in the level of federal support for low-income programs. For example, federal energy assistance for low-income populations has declined from a peak of $2.4 billion in 1985 to $1.3 billion in 1995, despite inflation and a notable increase in the number of low-income households during that period. [Note 7]
The restructuring of the electric industry is likely to present three challenges to low income populations:
As discussed above, electric industry restructuring is likely to lead to substantial changes in the structure and functions of customer service. Large industrial customers, with substantial market power, are likely to see declining rates and new services. Low-income households, with minimal market power, may be subject to loss of service, increasing rates, and consumer fraud.
Weatherization in low-income households involves the installation of a variety of conservation measures that improve the energy performance of the facility and decrease electricity bills. Energy assistance activities combine federal, state, and limited utility support to offset the expenses for electricity. These activities can include direct payments, special low-income rates, emergency assistance, percentage of income payment plans, and fuel funds. Federal support, the historic mainstay for energy assistance, has declined by more than half over the last 10 years while need continues to grow.
A more competitive electric power industry is likely to deliver some net benefits in the form of greater efficiency. However, it is not clear whether and how these benefits will flow through to small customers. Low-income customers, many of whom cannot afford even the most basic energy services, are particularly at risk. To ensure that low-income customers are not harmed by the introduction of competition, the regional Comprehensive Review proposed two strategies:
The state has a legitimate interest in promoting industries that create jobs and contribute to the economic well-being of the state and its residents. The electric industry is a major contributor to Washington's economy in two ways. The first is that electricity is more affordable to industries, businesses, and residents in Washington than almost anywhere else. This fact is of great importance to large, energy-intensive industries such as aluminum companies and steel smelters. It also plays a role, albeit less significant, in attracting new businesses, such as high-tech industries to the state.
Jobs are also created in building power plants, extracting fuel for generation, manufacturing energy equipment such as photovoltaic cells, and delivering energy efficiency. However, as a general rule, energy expenditures of all types create fewer jobs than other consumer expenditures.
Preserving employment at the Centralia coal mine is one of the justifications for the proposed tax breaks for pollution control equipment and coal extraction that will come before the Legislature this session. Coal extraction to fuel the plant employs several hundred skilled workers in the Centralia area, and pollution equipment will improve air quality beyond current levels. Owners of the project acknowledge that the plant would not be cost effective to operate without tax incentives. Legislators will be asked to balance the interest of supporting jobs against the value of allowing the plant to compete without state intervention.
Production of electricity has very significant environmental impacts. Electric power plants produce nearly two-thirds of nation's sulfur dioxide, one-third of the emissions of ozone precursors nitric oxide and nitrogen oxide, and one-third of the carbon dioxide. With more than half of our electricity generated by hydroelectric facilities, Washington does not face the same set of environmental issues as much of the rest of the country. Nonetheless, while hydroelectric facilities make no contribution to air quality degradation, they raise a different but equally daunting set of environmental challenges.
The state's dams have contributed substantially to the rapidly declining populations of salmon in the Columbia River and its tributaries. In addition, we are not immune from site-specific air quality issues. The Centralia coal-fired power plant is the second largest sulfur dioxide emission source in the western United States. Finally, nearly all new supplies of electricity will come from natural-gas-fired combustion turbines — a cleaner energy source than existing generation technologies, but certainly not environmentally benign.
None of these issues is new. Previous editions of the Biennial Energy Report included discussion of all of these topics. The question we face today is: How is restructuring of the electric industry likely to influence the environmental situation in Washington? The simple answer is that we do not know with any certainty. We understand some of the major outlines of a restructured industry but have little insight on specific details.
For example, one outcome may see the replacement of older fossil-fuel plants contributing significant environmental impacts with more efficient and environmentally "friendly" natural gas turbines. Another possible outcome could be increased use of these older plants, less funding for energy efficiency (which decreases pollution emissions), and little or no agreement to continue funding for restoration of endangered salmon runs in the Columbia River basin. Still a third result might see construction of a number of new combustion turbines to supply out-of-state markets. Each of these situations would result in different environmental consequences. It does seem clear that competitive pressures will lead to efforts to cut expenditures for environmental mitigation activities, and that without policy initiatives to sustain long-term investments in environmentally beneficial conservation and renewable development, these investments could decline even more.
The rest of this section focuses on two specific areas of major environmental concern - anadromous fish preservation and enhancement, and greenhouse gas emissions and climate change.
Salmon have long been a major component of the culture and economy of Washington and the Northwest. Native Americans have depended on salmon for food, economic livelihood, and cultural definition. Commercial fisheries are a major Northwest industry. Recreational fishing is a popular pastime and an economic mainstay for many. Yet the salmon population in the Columbia River system has experienced massive declines. Returning runs of salmon have fallen from more than 10 million fish during last the century to 550,000 in 1993, of which only 200,000 were from wild stock. [Note 8] Many species of salmon are now listed as threatened or endangered under the provisions of the Endangered Species Act.
The 1995 Biennial Energy Report section, Controversy on the Columbia: The Future of Salmon, described many of the reasons for this decline as well as the scientific and political controversies.
What new issues or information do we have since 1995, especially in light of the restructuring of the utility industry?
What are the environmental implications of this situation? One extreme would be little or no modification of the operation of the river and its tributaries. This approach could lead to continuing decline in fisheries and a system governed by the provisions of the Endangered Species Act.
An alternative scenario is one in which the river operation undergoes major changes to return it to some semblance of its historical operating characteristics (normative river operation). Under these conditions, less firm power would be available, although total energy could increase, decrease, or remain the same, depending upon how and when hydroelectric dams are operated. Fisheries may or may not improve, and conflicts with other uses, such as irrigation, navigation, and recreation, could increase.
If the region is unable to reach some agreement on how the operations of the river should be governed and how to provide funding for mitigation activities, the fate of both the power system and wild salmon runs is greatly at risk.
The 1995 Biennial Energy Report discussed some aspects of the global climate change issues and the sources of greenhouse gas emissions in Washington. Since the publication of that report, there is widespread scientific agreement that human production and use of energy resources and the consequent production of carbon dioxide and other greenhouse gases has begun to influence the world's climate. [Note 11] Yet, as of 1996, carbon dioxide emissions are still totally unregulated in the U.S. This presents a significant financial risk associated with potential future regulation, particularly to utilities and consumers that rely heavily on fossil fuels. International negotiations are currently underway that may well result in binding greenhouse gas reduction targets.
Washington's overall contribution to greenhouse gas emissions from electric production is small compared to most states because of our large hydroelectric base. However, new additions to the electricity system, such as natural-gas fired sources, will be greenhouse gas contributors.
Restructuring of the electric industry by itself does not alter the fundamental issues of global climate change. However, if some of the recent projections of declining prices for electricity and increased use do occur as a result of restructuring, we can expect greenhouse gas emissions to increase substantially as well. While some economists have tried to make quantitative estimates of potential increases, with ranges as high as a 40 percent consumption increase within ten years, their estimates remain little more than conjecture. Without a better understanding of the level of usage and the mix of resources to meet demand, we cannot provide any quantitative estimates of emissions.
Greenhouse gas mitigation for new power plants is already a substantial issue in Oregon. The state is seriously considering modification of its siting laws to make such mitigation a primary siting criterion. The Washington legislature is likely to see more emphasis on greenhouse gas issues as part of its deliberations on state and regional energy issues.
An opportunity exists, in the transition to competition, to accelerate the introduction of new, cleaner technologies. Since we pay for energy in both economic and environmental currencies, competition should aim to ensure that we decrease costs in all currencies, rather than shifting costs between the economic and environmental categories.
An additional issue for state legislators concerns tax treatment. For the most part, our tax structure collects retail sales taxes from sellers rather than purchasers. Thus, businesses are subject to the business and occupation (B&O) tax, which is based on a percentage of gross revenues. Industries in the "light and power business" like utilities — are exempt from the B&O tax but must instead pay a public utility tax of approximately 3.62 percent based on gross revenues from retail sales. [Note 12] Cities are also authorized to assess a public utility tax of up to six percent of gross revenues. [Note 13]
Under the U.S. Constitution, neither federal entities (like Bonneville) nor out-of-state entities (like some power brokers and marketers) can be taxed by the state. This means that any activities that Bonneville or other out-of-state providers engage in are not subject to state or local taxation. The tax revenue implications of this fact are potentially substantial. If a substantial fraction of retail sales are made by out-of-state or federal entities, many millions of tax revenue dollars could be lost.
The sections above highlight a number of questions that Washington's legislators and other decision-makers will face in the next two years. Fortunately, the Northwest region has already begun to work on these issues and may be in the position to provide some insights, data, and guidance to the state in the next several months. These discussions have taken place in a year-long forum that was given the title Comprehensive Review of the Northwest Energy System (Comprehensive Review.)
The Comprehensive Review was kicked off by the Northwest governors on January 4, 1996, by convening a steering committee of 20 distinguished members. Four of the members were ex officio representatives of the Northwest governors. A fifth ex officio member was designated by Bonneville. The remaining 15 members were chosen both to represent diverse interests in the electric energy industry, as well as for their individual prominence in the field. Appendix C contains biographies of the 20 members of the steering committee.
The Comprehensive Review Steering Committee investigated how to market federal power, how to structure the Northwest transmission system, what retail competition should look like, and how to deliver with public purposes.
A summary of the recommendations provided to the four governors on December 12, 1996, is included in Appendix B.
Several jurisdictional divisions complicate solving electric industry restructuring issues. These occur within the state, among states, and between the state and the federal government. As we move toward new industry structures, first, it is important to know who has oversight of various players in the industry. If jurisdiction varies among similar players (publics versus privates, utilities versus independent generators, etc.), it is more challenging to ensure that everyone is playing by the same rules. Where there are legitimate reasons for one set of players to be treated differently, these reasons should be clearly articulated and not a matter of jurisdictional happenstance.
Second, it is important for state legislators to understand the limits of their authority. As a rule, the state may not enact legislation that asserts jurisdiction or authority over an entity or activity that is already regulated at the federal level (such as wholesale energy transactions), or that is constitutionally exempt from state authority (such as Bonneville).
This report already has discussed some of the major differences between public and private utilities in Washington, including the partially tax-exempt nature of public utilities and the difference between local and state regulation of rates. Additionally, public utilities are entitled to priority access to federally marketed power for all their customers (termed "public preference"). Private utilities can get guaranteed access to such power only for their residential and small farm customers, and this access will be phased out over the next five years in the absence of new legislation.
The jurisdictional divisions between Federal Energy Regulatory Commission (FERC) regulation and Washington Utilities and Transportation Commission or local regulation are also complex. In general, FERC regulates wholesale energy transactions and interstate transmission. On the grounds that electrons do not respect state boundaries, FERC has asserted jurisdiction over all high-voltage transmission service, whether nominally in-state or not, and whether wholesale or retail. The legal question of whether FERC can legally assert jurisdiction over retail transmission transactions is still being hotly disputed between the states and FERC. A test case involving a Washington retail customer (Tosco) is now before FERC.
FERC's authority over publicly owned utilities and Bonneville is more limited. It can review Bonneville's rates only to determine whether they are likely to recover all costs; and it can review publicly owned utilities' transmission rates only if there is a dispute over access.
Wires and poles that transmit power fall into the category of either distribution or transmission. In general, distribution represents smaller lines that carry power to end users; transmission lines are higher voltage and take power from a generator to a substation or to a utility for redistribution. Where one draws the line between transmission and distribution is not clear-cut. Transmission does have two clear components: first, it is regulated by FERC and not by the states; second, it transmits large amounts of power either between utilities or from one utility's generator to its load.
Transmission issues have become increasingly important for policymakers in recent years. First, since FERC and Congress ordered open access in 1992, the transmission system has essentially been converted into a public highway system that anyone (in theory) can use. However, it is a highway system that is to a large extent privately owned; and the owners happen to own a lot of the "trucks" (energy) that are using it. Finally, like highways, siting and building new transmission is costly and controversial.
Discussions have been going on for over two years concerning the amount of autonomy or coordination of transmission that is optimal in the Northwest. A consensus has been emerging to have the region's transmission owners turn over some operation, pricing and control functions to an independent grid operator (IGO). In the summer of 1996, the private utilities owning transmission in the Northwest announced their intent to form an IGO, which they dubbed IndeGO. They were joined later in the year by Chelan County PUD, Tacoma Public Utilities, and Bonneville, which owns the single largest portion of Northwest transmission. Bonneville's participation in an IGO is a subject of the Comprehensive Review.
An issue of increasing concern to utilities and customers is reliability. At the transmission level, reliability is monitored by a voluntary organization of utilities and other market participants termed the Western Systems Coordinating Council (WSCC). WSCC is a member of the North American Electric Reliability Council (NERC), which monitors system reliability issues for the North American continent. In the summer of 1996, two major western outages highlighted the need to improve communications among utilities and other participants to ensure that the reliability of the system is adequate at the high-voltage level. Further details of these outages and responses is included in Section 4 of this report. California recently passed legislation asking the California Public Utilities Commission to discuss the possibility of forming a western interstate compact to regulate transmission reliability. Washington will be involved in these discussions. In December 1996, the WSCC Board of Trustees voted to recommend mandatory compliance with uniform reliability criteria by all market participants. This matter will be taken up by NERC in January 1997.
At the distribution level, most outages occur through accidents (e.g., cars hitting trees) or so-called "acts of God" (e.g., windstorms). Minimizing these reliability problems is very costly, involving expensive undergrounding of wires or more local generation. Customers seem willing to undergo one or two minor outages a year rather than pay significantly higher electric costs.
Some types of customers, however, have a need for higher levels of reliability than others. Industrial customers with electronic equipment or production lines lose millions of dollars with an outage of only a second or two. Customers on life support systems depend on reliable electricity to live. The most cost effective response to this type of problem may be for individual customers to install equipment to provide backup power or voltage support to ensure that they have exactly the level of reliability they need.
One benefit of increasing competition is likely to be that customers will be able to
choose the type of service that best meets their needs. One element of that choice could
be choosing a reliability level that is appropriate and affordable for each customer, or
perhaps each neighborhood. 
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Note 1. Energy Information Administration; Inventory of Power Plants in the United States, 1994; Table 20. Installed Washington generation totaled 23,880 megawatts in 1994; the three other Northwest states had 16,832 megawatts combined.
Note 2. See RCW 84.36.010.
Note 3. P.L. 99-495.
Note 4. See WAC 480-100-251 for private utilities; RCW 80.52 for joint operating agencies; and federal law for some Rural Electrification Act cooperatives; Northwest Power Act, P.S. 96-501, section 4(d)(2) for Bonneville.
Note 5. Northwest Power Planning Council (NWPPC), Draft Fourth Northwest Power Plan, Appendix G-2.
Note 6. NWPPC, Power Plan, Chapter 6.
Note 7. BCS, Incorporated, Impacts of Electric Utility Industry Restructuring on Low-Income Energy Assistance Programs, February 1996.
Note 8. Columbia River System Operation Review, Final EIS, November 1995; DOE/EIS 170.
Note 9. NW Fishletter, September 20, 1996.
Note 10. Ibid.
Note 11. See for example, United Nation's Intergovernmental Panel on Climate Change (IPPC), Second Assessment of Scientific-Technical Information Relevant to Interpreting Article 2 of the UN Framework Convention on Climate Change.
Note 12. RCW Chapter 82.12.
Note 13. RCW 35.21.860-870.
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Federal Energy Regulatory Commission
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The print version of the 1997 Biennial Energy Report is available free of charge. To order, contact Julie Palakovich at (360) 956-2098, or send e-mail to wepg@ep.cted.wa.gov.